Monetary policy arguments can sometimes seem other-worldly, the modern equivalent of the medieval intellectual battle over how many angels can dance on the head of a pinhead? Guido (neo-Hayekian) has been rowing with Will Straw (neo-Keynesian) for years – our latest skirmish is here. It is a difficult subject to popularise in an accessible way. Straw often cites David Blanchflower, formerly of the MPC and a favourite of Gordon Brown, to back his case. Blanchflower it was who predicted a year ago that if Chancellor Osborne didn’t undertake a £90 billion stimulus package, unemployment would hit 4 million. Osborne ignored him and unemployment is down as we undergo an expansionary fiscal contraction.

In turn Guido cites the noted American actress and legendary redhead bad-girl Lindsay Lohan. She has a manifestly clearer grasp of the inflationary dangers of quantitative easing than David Blanchflower:

Have you guys seen food and gas prices lately? U.S. $ will soon be worthless if the Fed keeps printing money! http://spn.tw/t1exbE#ad

It seems a long time ago that Will Straw, the former Treasury spin doctor under Gordon Brown now turned blogger and think-tanker, was arguing about the need for the Balls/Brown tax, borrow and spend stimulus plan. The voters and the 2010 general election put paid to that and George Osborne has resisted the calls of Balls (and Will) for more government borrowing to spend on boosting short-term growth. Will Straw argued, citing research by a “progressive” American economist, that spending increases were the most efficient form of deficit spending. The theory can now be tested against the outcome.

Obama did implement a massive $787 billion stimulus programme financed by more borrowing of the kind that Will Straw and Ed Balls still advocate. The chart above shows the results versus the predictions. Unemployment is far higher than the supporters of the “porkulus” projected, higher even than they projected it would be without wasting three-quarters of a trillion dollars. Not since the 1930s has US unemployment been so high for so long. Told you so.

Douglas Carswell has spotted a Statutory Instrument slipped in before parliament without prior debate, two pages of legislation which will cost the British taxpayer £9 billion, the equivalent of adding some 1½p to the basic rate of income tax. No debate, no big announcement, just another day of propping up the Eurozone on the backs of UK taxpayers.

The Chancellor was at the Bilderberg conference this weekend, where the global elite discuss important matters without tiresome worries like democracy or transparency, among the attendees were central bankers, financiers and investment bankers – the guilty men of the financial crisis. The Chancellor has clearly fallen in with a bad crowd…

UPDATE: Osborne’s PPS Greg Hands has been rolled out to defend the £9 billion loan. The crucial point he makes is that “Because this is a loan, it has no impact on our borrowing – it is a financial asset that will be repaid.” All being well, however all is not well. Institutions like the ECB itself are in trouble, the US Treasury is on credit watch. We may be approaching the financial equivalent of the rapture, when all the reckoning for decades of loose credit will be made. One only has to look at the price of gold to see that people are losing faith in the paper-money financial system.

The whole Ed Balls alternative economic strategy was first predicated on a double-dip recession, we hear no more of that nowadays, then it shifted from warning of a double-dip to lamenting slow GDP growth – even though UK GDP growth is above the EU average. But most incessantly Ed Balls wants George Osborne to stop reductions in the bloated public sector headcount “to hold down unemployment”. Coincidentally Labour’s paymasters are public sector unions…

In reality small firms are hiring workers, driving job creation, and according to the authoritative Manpower survey [PDF] hiring intentions are up 8% in the coming quarter and overall nationally recruitment is 3% above trend, a level not seen since the height of the financial crisis 3 years ago. Balls’ ideological adherence to Plan B is now rendered totally unnecessary…

Growth is anaemic, that much of the Balls critique is true, the cause is not the government’s spending cuts, they have barely started, the £6 billion down payment on deficit reduction is not even 1% of GDP. Some of the reasons are external; US economic doldrums, Japanese earthquake related supply-chain disruption, cost push inflation and some are internal; lack of business and consumer confidence, difficult credit markets and rising interest rate expectations. So what is to be done?

“…tax cuts are faster to implement and more credibly temporary than expenditure shifts and should be targeted to investment, low-income households, or job creation to increase their multipliers… Simultaneous adoption of deeper long-run entitlement reform would be desirable to safeguard fiscal sustainability and market confidence…”

It also points out that

“The level of public spending as a percentage of GDP in our forecast has reduced by about half a per cent of GDP as compared to the previous fiscal year. However, it remains very far above the pre-crisis levels of spending and represents a long-term high in spending. It’s important to maintain that perspective”

Plan B, the Balls plan, is for higher taxes and more spending, the same plan Brown had which took us to the brink of bankruptcy with the biggest government deficit in the G20. That can be dismissed as a failed ideology, now tried for 13 years and tested to destruction. If faster growth is required the IMF actually recommends an accelerated Plan A, “Plan A+”, cutting taxes for those on low-incomes, cutting welfare payments to those who are healthy yet on long-term unemployment benefits and cutting overall government spending back to where it was before Gordon. The UK is cutting public spending slower than Obama and at a rate slower than even the EU average.

The IMF’s Plan A+ to boost growth should be considered along with supply-side reforms to boost business confidence, if we rolled back government spending there would be more room for income tax cuts to boost consumer confidence. If we want more private sector jobs and to grow the economy fast and sustainably, Plan A+ makes sense. Preferably sooner rather than later.

Before finishing his term on the Monetary Policy Committee Andrew Sentance warned that the Bank of England is in danger of losing its credibility on inflation. Guido has been warning since 2008 that inflation is not a blip and that it was baked in to the economy. Letter after letter from Mervyn King to the Chancellor has excused missing the inflation target as temporary and promised it would decline in the months ahead. Promises now shown to be demonstrably false.

Ladies and gentlemen, Guido presents the Great Inflation Swindle, we have just seen the second-biggest one-month increase on record and a record high in core CPI yet the Governor of the Bank of England has told us for 3 years inflation was a blip and that the real danger was deflation. It was a deliberate lie to excuse the most reckless monetary loosening since… well, actually monetary policy has been too loose globally since back to 1998 when Greenspan “saved the world” after Long Term Capital’s financial theory geeks had a close encounter of the reality kind. The loosening up of monetary policy to smooth the aftermath of that hedge fund collapse told financial risk takers to rack up the risk because central banks would step in if you got in to trouble. Everyone was “too big to fail”. Central bankers turned capitalism from a system of profit and loss into a system of private profits and socialised losses.Taxpayers had their chips put on the gambling table without even being asked.

From 1998 to 2008 central bankers failed in their primary task of taking the punch-bowl away when the financial party gets too swinging, drunk on cheap credit and easy profits. In 2008 the solution when the excrement hit the air-conditioning, with interest rates already at rock bottom, was Quantitative Easing (QE). The excuses given for printing money on such a massive-scale were two-fold, to ward off an imaginary “deflation” bogeyman and to provide an economic stimulus. Those of us who said this would inevitably result in inflation were shouted down. We now have inflation at almost double target and rising, the huge cost of the monetary stimulus has provided very little growth and undermined Cameron’s stated aim of “sound money“.

“Sound money” is not something that the Bank of England seems to be aiming for or even expecting. Guido has remarked on the Bank of England Pension trustees prescience before, their success is a little short of scandalous. If there was evidence of insider trading at a normal fund the investors would be in jail. Whilst Mervyn King’s Bank of England scaremongers about a deflation bogeyman his pension bets on the exact opposite – buying inflation protected securities on an amazing scale. Guido has discovered that Mervyn King’s pension is 94.7%* invested in index-linked, inflation protected securities, up from an already remarkably high 88.2% the year before.

This is the exact opposite of what you would do if you really feared deflation, in a deflationary environment fixed income securities rocket, out-performing index-linked securities. Mervyn King’s Bank of England pension pot profits from doing the exact opposite of what it should if the trustees believed the Governor’s pronouncements were credible. This is no accident, Guido believes it is the deliberate policy of the Fed and the Bank of England, with the complicity of their political masters in the US Treasury and HM Treasury, to inflate their government debts away. Inflation is a pernicious form of taxation, it punishes the old and those who save and leads to a worse reckoning in the end. We are being deliberately swindled by the political elite.

*Just 22% of UK gilts are inflation-protected, the Bank of England pension fund’s skew towards expecting inflation is that pronounced.

Earlier this month the Guardian front paged a story revealing that the City of London accounted for £11.4 million of the Conservative Party’s funding in 2009 – 10, in lurid terms we learned of the millions passed to Tory coffers by rich hedge fund managers. Guido can reveal that during that same period the Guardian Media Group’s coffers gained £39.3 million from investments in hedge funds. More than three times as much as they castigated the Tories for taking from hedgies…

GMG owns the Guardian and Observer newspapers, where journalists and columnists rail against the City, hedge funds and the short-termism of pin-striped financial traders. Documents obtained by Guido reveal that the GMG board approved investments now totalling £223.8 million in speculative funds in a range of assets. Alan Rusbridger, editor of the Guardian, sat on the board which approved the hedge fund investment plan, the board was at the time chaired by Paul Myners who also sat on the board of GLG partners, a hedge fund which is widely reported to have made big profits shorting UK banks.

The funds are traded by a number of specialist fund managers, overseen by the giant U.S. based asset manager Cambridge Associates. Cambridge Associates is a secretive, privately held firm with a client list which includes billionaires and government sovereign wealth funds. Guido has discovered that the £223.8 million is invested in emerging markets, bonds and hedge funds. The investments are principally in US Dollars and offshore from the UK.

In the small print of GMG’s 2009 Accounts

These short-term funds are in addition to the GMG assets held in Cayman Islands domiciled corporations where the rate of corporation tax is zero. Sources suggest that GMG has between £300 million and £500 million held offshore in these opaque special purpose vehicles. Such tax haven domiciled corporate vehicles are used to shield assets from tax. Guido has discovered that one GMG controlled Caymans corporation was incorporated as recently as March 2008, a mere 5 months before the banking crisis wreaked havoc on the global economy.

So far GMG has ignored embarrassing questions posed since the winding up of the old Scott Trust. What Guido and many confused Guardian readers would like to know is how the use of these opaque investment vehicles is compatible with the public positions taken by the newspapers and even members of the board. Will Hutton for example is a former editor of the Observer who sits alongside Alan Rusbridger on the board of the Scott Trust Foundation. Is Hutton, a noted campaigner against hedge funds, comfortable with GMG having hundreds of millions in assets both offshore and invested in hedge funds? Are the perennially loss making Guardian newspaper’s columnists like Polly Toynbee happy to have their six-figure salaries paid out of the profits of hedge fund raids on the currencies of emerging market countries? Isn’t it about time the Guardian’s senior executives explained openly and honestly to its readers how it really survives despite losing money every year?

This time last year an economist wonk at the liberal-leaning CentreForum took a dislike to Guido’s economic foresight. Deficit denying Liberal Conspiracy made a predictably over the top attempt at playing up the difference of opinion calling Guido innumerate, an […]

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